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Tuesday, 13 March 2012

An oil tipping point

SocGen is out with a new note on The global engine’s oil problem, looking at how long the global economy can bear prices at these levels.

Here's the key part:

While there is clearly upside for oil, due to real and threatened supply disruptions, the upside also continues to be contained by the limited strength of global demand, as it was through 2011. As a share of the global economy, oil consumption is already at extreme levels. Though coal and natural gas prices have helped contain the overall global energy budget, it is clear that another surge in oil prices, resulting from a supply disruption and not a surge in economic strength would be enough to tip the global economy back into recession. What is also important is that a weaker EUR and higher Brent prices have resulted in a disproportionately high price for the more fragile European economies. By contrast, the weaker mid-continent WTI price in the US, though not being felt at the pump owing to stronger product exports, has boosted refinery margins and lifted oil transportation and infrastructure employment in the US. In China, a stronger CNY and cheaper Asian and Middle Eastern oil have also dampened their exposure to the price rally. Emerging markets are additionally being cushioned by still relatively low coal prices and a lower aversion to coal consumption.